Written by: John Drachman Unicorns, those private equity start-ups that tip the scale at $1 billion, are increasingly the subject of a growing number of portfolio discussions. In recent years the number of companies reaching billion-dollar unicorn valuations has ballooned. Fifty-three startups earned unicorn valuations in 2017, followed by another 23 in 2018. In less than two decades, the PE asset class itself has soared from a $30 billion to more than $4 trillion, according to research site Pitchbook. In contrast, the number of publicly held companies has dropped nearly 50% since 1996, according to research from the World Federation of Exchanges. The reasons why public stocks have been losing favor aren’t complex. The cost, time commitments and regulatory requirements needed to go public are causing a lot of growing companies to stay private longer. Rather than fight the decline of public offerings, many stock investors are contemplating the switch to PE and unicorns. As a result, the U.S. now has about 150 unicorns, including such bellwethers as the global Airbnb home rental franchise, Epic Games, and retail fintech companies like Robinhood and Sofi. Whether you may be attracted to a unicorn that is a PE offering, a Venture Capital deal, or something in between, finding the right unicorn can be an adventurous and potentially rewarding move if you have an above-average risk profile.
Are You a Unicorn Hunter?Investors who opt to take a unicorn for a ride will need to keep in mind that investing in unlisted businesses is a high risk, high reward proposition. Diversification and research are the keys to success here. Some start-ups fail while others, like Google and Amazon, go on to scale great heights. To maximize your chance for success consider five steps:
- Diversify, diversify, diversify Reduce the impact of single-name exposure. Try to invest in a range of opportunities across different sectors and business models to improve your odds.
- Quantify costs Fees for unicorns can get pricey, approaching 2% annually on assets. Commit to understanding the fee structure upfront.
- Limit potential for loss. Many investors typically allocate no more than 5% to 10% of their portfolio to PE or VC unicorns.
- Be a detective. Ask questions like: “How do the owners collaborate on ideas?” Also, investing in a business model or industry you know about can give you an inside advantage.
- Ask for help. You don’t have to believe in unicorns all by yourself. Financial advisors familiar with the PE market can show you how to spot a healthy beast among the unicorns – one that suits your portfolio objectives and interests.